ALZA and Bio-Electro Systems (A): Technological and Financial Innovation

ALZA and Bio-Electro Systems (A): Technological and Financial Innovation: "

To develop the next generation of risky products, ALZA, a mature and profitable biotechnology firm specializing in drug delivery systems, must raise $40 million. Organizational constraints and competitive concerns demand that the work be done inside the firm. However, accounting considerations and concerns about shareholders' reactions to the introduction of new risks to the firm lead the CEO to consider off-balance-sheet means to finance the new venture. To finance the new venture, the firm creates a new financing vehicle: a unit consisting of callable common stock plus warrants. This case examines the CEO's decision leading up to the issue of the units and the establishment of a new research and development subsidiary.

Learning Objective: To (1) demonstrate how strategic, organizational, accounting, and shareholder considerations may constrain financing decisions and lead to financial innovation; (2) allow students to examine the mechanics and logic of rights offerings and the role of underwriters; and (3) allow students to value a new security with embedded options and to use this valuation to examine anomalies in the pricing of a new product.

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